Last December, Finance Minister Jim Flaherty announced that, starting in 2017, the annual increase in Canada Health Transfer payments to provinces would stop exceeding the growth rate of the economy, as it has done in the past. In addition, he confirmed that he intends to make payments strictly on the basis of total provincial population. Is this distribution rule fair?

Provincial health-care spending is huge ($130-billion nationally in 2011), but per capita costs differ markedly across provinces. A key source of these differences is the age structure of the population. The reason this matters so much is the fact that provinces have to spend five times more per capita to care for the 65-and-over population than for younger Canadians. In 2009, health-care spending averaged $3,515 per capita for all age groups, but the split was $11,175 for seniors and $2,275 for the less-than-65 population.

The resulting demographic pressure on costs was heaviest in Nova Scotia, where seniors make up nearly 16% of the population, and lightest in Alberta, where they account for less than 11%. This simple observation makes clear that distributing the Canada Health Transfer based strictly on total provincial population, without taking the demographic share of seniors into account, is a rule that imposes an unfair punishment on provinces whose population is older than the national average.

A simple solution to this problem would be to replace the one-tier transfer based solely on total population by a two-tier transfer reflecting the population share of seniors.

Here is how it would work in 2012. Instead of making a per capita payment of $815 to provinces, as has been announced, the government would send $525 for each person under 65 years old and $2,590 (five times more) for each person over 65. Adopting this rule would leave the total amount of the Canada Health Transfer unchanged, i.e., it would remain at $28.6-billion as projected. But these billions of dollars would be distributed in a way that would (intelligently, in our opinion) take into account the pressure on health costs resulting from an older population.

Under this two-tier rule, the three Maritime provinces, where population shares of seniors are largest, would get 4% to 6% more in federal payments than under the one-tier program. Newfoundland-and-Labrador, Quebec, Saskatchewan and British Columbia would see their share increase by 2% to 3%. Manitoba would be little affected, and Ontario would lose 1%. Finally, due to its population being very young, Alberta’s share would be adjusted downward by 9%. (Our suggestion could be refined by using the data made available by the Canadian Institute for Health Information on per capita costs of health care by detailed age-sex groups.)

We argue that making the Canada Health Transfer strictly proportional to total provincial population imposes an unfair punishment on provinces whose population is older than the national average. The rule change we are proposing is independent of the currently-debated question of what the total amount of the Canada Health Transfer should be. It would at least get rid of an obvious inequity, while retaining a distribution formula that would still be population-based.

National Post

Jean-Pierre Aubry is an economist and associate fellow at CIRANO. Luc Godbout is professor of taxation and public finance at Université de Sherbrooke. Pierre Fortin is professor of economics (emeritus) at Université du Québec à Montréal.

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